Bitcoin and Gold — Stores of Value and Safe Havens
I think most understand that traditional fiat currency has its limitations as a store of value. Keeping your money in SGD, USD or RM opens one up to two main threats:
- Dangerous government policies such as currency devaluations or quantitative easing
- General inflationary pressures that accrue over time
Where a government embarks on a policy to deliberately devalue its currency (link) or a quantitative easing measure to spur its economy, the value and purchasing power of the fiat currency in question naturally lessens. This is because such methods essentially mean that a government is printing more of the fiat currency in question, which naturally lowers the value of a single dollar. Similar issues arise where general inflation is concerned — due to a variety of reasons, the amount of goods and services that a single dollar can purchase in 10 to 20 years’ time will inevitably be significantly less than it can do so today [click here to understand some of the reasons behind inflation better (link)].
The question is then this: by what means can people protect themselves against this uncomfortable erosion of value? Many believe that assets like Bitcoin and gold are the answer. The beauty of assets like Bitcoin and gold is that they possess a natural level of scarcity that remains independent from government influence. Gold is scarce because there is only so much gold one can realistically mine from the Earth. Bitcoin is scarce because of the increasing computational difficulty required in mining (which creates the 21 million hard cap). As such, no government in the world can print more gold or create more bitcoin.
Ultimately, this supply-side limitation is a key requirement that many investors look for in finding a good store of value. It ensures there will not be a sudden influx of the particular asset to cause a depreciation.
On top of being a store of value, Bitcoin and Gold also find similarities in that they provide a safe haven option as well from traditional stocks or bonds — these are often far more sensitive to market turbulence, downturns or economic recessions. Unlike stocks and bonds however, the value of Bitcoin and Gold is not determined by factors such as earnings or interest payments and thus remains relatively immune to these factors.
Bitcoin and Gold — The Relationship
Given the nature of these assets, one might think that both Bitcoin and Gold would be positively correlated in any given market. Oddly enough though, analysts have suggested that Bitcoin and Gold actually have a slightly negative relationship (link 1, link 2). In my view, this perhaps indicates one of two things:
- The market is beginning to view Bitcoin as a better store of value than gold
- The market actually considers Bitcoin less of a safe haven asset and more of a higher risk investment, to be avoided in poorer economic conditions.
There is plenty of support for the first point (i.e. that Bitcoin is a better store of value). In fact, in 2016, the Winklevoss twins came out and argued that “Bitcoin was better at being gold than gold itself”, at least in this regard. There are a couple of stated reasons for this:
- Bitcoin has better scarcity — The global supply of gold has actually been rising by 1 to 2% over the last century. Although it has not increased at the same levels as the USD, Bitcoin is superior in this regard with its fixed and transparent supply.
“If you were to ask people what gold’s supply schedule looks like over time, they probably wouldn’t draw you something that looks like an exponential curve. With gold being sneakily inflationary, it’s not set up to preserve value in the way that bitcoin is.” — Chris Burniske, blockchain products lead with ARK Investment Management.
- Bitcoin is more portable and suitable in our digital age. A crucial element for a store of value is that it needs to be universally accepted and demanded over time; demand side support for a store of value is equally important as supply-side scarcity. Bitcoin, in its transferability across borders and digital nature, appears to be far more attractive in this regard than a clunky yellow piece of metal. (link)
However, there is some merit to the alternative view above (i.e. that the market still considers Bitcoin less of a safe haven asset and more of a higher risk investment).
- Gold is not reliant on internet access — Dave Kranzler of Investment Research Dynamics argues that gold’s advantage over bitcoin is that it’s not dependent on the operation of the internet, thus affording it a degree of protection from heavy-handed regimes that may control internet access. In fact, it is argued that gold has also proven itself to be of value even when governments attempt to restrict its usage or outlaw it completely. This happened in 1933, when President Franklin D Roosevelt implemented measures to prohibit and criminalize its possession in the US.
- Unlike Bitcoin, gold has a proven track record to instill trust and confidence. As Coindesk notes, while asset classes like Dutch tulips, Japanese real estate, dot-com companies and the US housing market have boomed and busted, gold has consistently plodded ahead, withstanding the test of time (link). Bitcoin has not been around long enough to have truly proven itself in this regard.
- Gold is possibly more durable. Although Bitcoin is understood to be immutable on the blockchain ledger, I agree with Robert Cookson in his article (link) that this may fall short of the virtual indestructibility of gold. Cookson lays out three concerns that Bitcoin may have where it comes to durability — (1) Hot wallets and exchanges are still vulnerable to hacking and stealing; (2) Losing a private key is much more likely to happen than losing a huge chunk of gold; and (3) there are many uncertainties over whether advances in cryptographic technology (e.g. perhaps via quantum computing) may threaten the much-heralded immutability of the blockchain.
At this stage, we can see that there is a swathe of opinions in the crypto and financial world on these topics. This is unsurprising given the fairly nascent nature of Bitcoin. As such, we would love to hear your thoughts on Bitcoin and Gold and your investment strategies concerning the two! Comment below or join the Tokenize Exchange communities to do so.
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